Clarion’s Take on Asset Managers’ Role

Asset managers could be considered the unsung heroes of the real estate investment process; they operate “where the rubber meets the road” and are involved in every major decision from initial acquisition to, ultimately, the sale. Craig Tagen, head of asset management at Clarion Partners, talks to PrivcapRE about what asset managers contribute and how they add value to the investment.

PrivcapRE: It’s a truism that the success or failure of almost every acquisition depends, in part, on successful asset management strategies that are implemented over the holding period. How does asset management fit into the big picture of real estate investment?

Craig Tagen, Clarion Partners: It’s an industry cliché that 70 percent of the investment return can be traced back to the “buy,” with the balance generated between purchase and sale. That means 30 percent of the return is in the hands of the asset manager. During the hold period, the rubber really does meet the road, and asset managers have to fully understand their market and the competitive set, secure good tenants and make sure their needs are met, and be thoroughly familiar with every aspect of the investment. Asset managers proactively work each asset to create value, which takes time and effort. Ultimately, they determine the optimal time to exit the investment and implement the sell strategy.

What steps can the asset manager take to turn a troubled investment around?

Tagen: At this point in the cycle, there are fewer troubled assets than we saw in the depths of the downturn. But a portfolio may have assets with structural or locational issues that can’t easily be resolved, and these can require extraordinary measures. The asset manager analyzes the property’s best use and recommends strategic options: a repositioning program to build value for the next cycle, or cutting the loss and executing a sale at the highest market-clearing price.

How early should an asset manager be brought into the acquisition process?

Tagen: Asset managers work closely with acquisition professionals from the start. In many cases, asset managers use local relationships to help source transactions. The best new investments are often found where asset managers are already active; local expertise can help to uncover the next best asset to acquire.

Sustainability is increasingly important to investors. What role does the asset manager play in reducing the environmental impact of a building?

Tagen: Asset managers are on the front line in establishing ESG [environmental, social and governance] strategies. It’s just good business practice to implement an energy policy and to involve customers, tenants, and residents in that strategy. Sustainability includes energy and water conservation, green cleaning practices, recycling, proper disposal of construction materials, and using more sustainable materials to build out tenant spaces.

What are some of the challenges that asset managers face in the current climate?

Tagen: Many Class A assets are valued close to—or even above—historic highs, while occupancy and rents are increasing in most markets. Asset managers are always looking for ways to operate assets efficiently and to be smart with capital expenditures. Of course, at some point the market will turn, and asset managers need to have a good sense of when to lock in credit tenants for the long term or, alternatively, when to hold off on early renewals. It always comes down to knowing the market and the competitive set, accurately assessing new supply, and determining the best strategy to outperform for investors.